During the recent stock market surge, numerous companies issued initial public offerings (IPOs). While some have performed well, many have provided flat to negative returns. This begs the question, how have other IPOs performed over time? But first, let's take a look at the performance of the Nifty.
If the last three years are divided into one-year periods, Nifty has returned 52% in the first (October 20-October 21) and 52% in the second (October 21-October 22) and third (October 22-October 23). Does IPO investing generate alpha in an environment where the benchmark has provided marginal returns for two-thirds of the time?
In the last three years, 143 mainboard IPOs have been listed. The bulk of these businesses are in industries such as healthcare, chemicals, capital goods, and finance. Furthermore, the IPO subscription ratio has been on the high side, with some IPOs receiving more than 100x subscriptions. While the IPO craze has subsided in recent months, investor interest has not totally subsided.
76% of the 143 IPOs have provided positive returns on the issue price. However, with more than 60% of IPOs being subscribed more than 10x, gaining subscriptions in IPOs is tough. As a result, the listing price is a stronger indicator of an IPO's performance. 38% of IPOs have given negative returns from the listing price, and 44% have underperformed the Nifty. Furthermore, just 12% of IPOs have been multi-baggers with returns greater than 100%.
When the 6-month and 1-year performance of IPOs from the listing price is examined, more than half of the IPOs gave negative returns in the 6-month period, and 37% of the IPOs gave negative returns in the 1-year period. While this tendency may appear frightening, 19% of IPOs have doubled from their listing price in a one-year period. In addition, 58% of IPOs outperformed the Nifty during a one-year period.
In the last year, 75% of the firms that have been listed have generated positive returns, and 38% have given returns of more than 20%, which is good alpha given that the Nifty has only delivered 6% returns.
Companies with double-digit returns or multi-baggers come from a variety of industries, including BFSI, cars, healthcare, and consumption. While the sectors may differ, one thread that connects them all is that the corporations have India-focused businesses. In a difficult context in which many global economies are grappling with inflation and de-growth, India's healthy economic environment, stable policies, and expanding infrastructure have boosted these enterprises.
With several companies filing their DHRPs with SEBI, the market should expect a steady flow of IPOs. While historical data implies that IPO investing has a decent chance of producing alpha, other aspects including company valuations, market buoyancy, and macroecon
